Many of my prior posts have highlighted the critical needs for increased supply chain collaboration among the world’s largest manufacturers. This is especially evident for large worldwide manufacturers operating subcontractor arrangements in developing nations and “tiger economies”, such as India, Mexico and China (and the rest of Southeast Asia). I have stressed how the most successful greening efforts in supply chains are based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies. I’ve further stressed how suppliers and customers can collaboratively strengthen each other’s performance, share cost of ownership and social license to operate and create “reciprocal value”. But supply chain sustainability and corporate governance must be driven by the originating manufacturers that rely on deep tiers of suppliers and vendors for their products.

In the fall of 2010, GE conducted a Supply Chain Summit in Shanghai, China. China was selected as the first supplier summit venue outside the United States mainly because of the ‘unique set of challenges global manufacturers face in conducting overseas manufacturing’. As GE’s Supply Chain Summit site notes, “China’s manufacturing industry has grown immensely over the past decade, faster than its environmental controls and the availability of skilled managers. Thirty percent of GE’s suppliers covered by the company’s Supplier Responsibility Guidelines Program are in China, yet more than half of the environmental and labor standard findings under the Guidelines Program have been identified in the country. Many factories continue to struggle to meet standards and local laws regarding overtime, occupational health, and environmental permits.” This suggests that the ratio of negative supplier findings to supplier location is higher in China than in other geographies where GE operates.

To meet that deficiency, a key element of GE’s supply chain management program relies on intensive supplier auditing and oversight. GE’s comprehensive supplier assessment program evaluates suppliers in China and other developing economies for environment, health and safety, labor, security and human rights issues. GE has leaned on its thousands of suppliers to obtain the appropriate environmental and labor permits, improve their environmental compliance and overall performance. GE performs due diligence on-site inspections of many suppliers as a condition of order fulfillment and as part of its tender process.

In a two-year period from 2008 to 2010, GE’s supplier environmental and social program focused assessments were conducted in 59 countries, in addition to performing “spot checks” or investigating complaint or media initiated concerns at particular factories. Some suppliers noted “audit fatigue” which can be perfectly understandable (being an auditor myself I can appreciate the wear and tear this causes on the mind and body after a while!). Third-party firms conduct some of the inspections. However, many of those participating in the audits found that third-party firms often did not provide the critical “how to” guidance as to altering business practices to assure future compliance.

What appeared to be most beneficial to manufacturers is GE’s detailed auditor-training program, which includes instruction on local law requirements and field training followed by a supervised audit with an experienced GE auditor. The summit findings noted that dealing with the hands on “how to” aspects of solving non-compliance issues greatly helped Chinese manufacturers to “understand the importance of treating their employees fairly and the need to systematically manage the environmental impacts of their operations”. Suppliers at the summit also highlighted the business benefits that resulted from this “maturing approach to labor and environmental standards, including improved worker efficiency and morale, an enhanced reputation, and increased customer orders”. GE’s more advanced suppliers shared that they were developing management systems or integrated processes to proactively address issues and risks.

Education First!

EHS Academy, courtesy GE

In addition, GE and other multi-national companies (including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics) have partnered to create the EHS Academy in Guangdong province. The objective of this no-profit venture is to create a more well-trained and capable workforce of environmental, health and safety professionals, and give them the management, implementation and technical knowledge to be able to proactively assure ensure “that real performance is sustainable and integrated fully into the overall business strategy and operating system” of a company. Chinese regulatory agencies are also invited to participate as well. The model that GE is using in China offers a positive example of collaborative innovation.

As large companies like GE and Apple expand their production capabilities throughout the globe, it’s vital that they continue to seek ways to train and educate contract manufacturers on environmental and social issues. This may be tough to do because countries like China are still in the “ramp-up” phases of economic development. Plus it’s been evident for some years that enforcement of environmental and social laws and regulations by government agencies has not been on par with the intent of the laws. It’s also likely that (for the foreseeable future) Chinese political and economic systems will remain focused on rapid development at all costs. So it’s critical that local/in-country government policies be aligned as well to support capacity-building for companies to self-evaluate, learn effective auditing and root- cause evaluation, institute effective corrective and preventive action programs and seek means to systematically achieve continuous improvement through proactive environmental and social management systems.

The GE program offers a glimmer of hope that (in China and similar developing economies) that multi-stakeholder, collective and timely collaboration may (someday soon) tame the tiger.

Last week, on the way to a business meeting in downtown Portland I tuned into the local sports radio station. Nationally syndicated sports commentator Dan Patrick (“DP”) was providing his one minute Above the Noise segment. The focus was on if, how and when sports icons that have fallen from grace (due to an off the field indiscretion) they could ever redeem themselves in the public court of opinion. And could they ever regain public acceptance to be ‘marketable’ commodities again. Think player product endorsements. Think Tiger Woods, Michael Vick, Ben Roethlisberger, Kobe Bryant, Ron Artest- well the list is WAY to lengthy to cover here, but you get the idea. Most that have regained endorsement status (like Bryant) have either redeemed themselves through community service and on field performance, but often the public-at-large (er, consumers) just forget. The past indiscretions have faded from the tabloids.

So I got to thinking that this sounded very familiar when it comes to companies (manufacturers and service industries in particular), and the ways in which they address sustainability matters. I am thinking of manufacturers who have made environmentally impactful products, and willingly or knowingly conducted socially irresponsible or possibly unethical business practices that have led to public backlash. And I thought about how some have been able to successfully “redeem” themselves and regain a positive marketplace reputation, while others never quite recovered.

Since this past week Apple was in the news, I thought DP’s radio op-ed was a perfect parallel. According to a report issued by anti-pollution activists in China, Apple is more secretive about its supply chain than almost every other American company operating in the country. Apple came up among the laggards among 29 major electronics and IT firms in a transparency study drawn up by a coalition of China’s leading environmental groups. The reports focused on “the openness of IT firms and their responsiveness to reports of environmental violations at suppliers”. Though Apple is known in the industry for the secrecy it wraps around its newest product offerings, the “mystery of its supply chain is more a matter of covering up than preventing leaks”, the report stated. The report claimed that Apple’s suppliers have been involved in breaches of environmental regulation, including major waste discharge violations in recent years at several Chinese firms that are believed to be part of Apple’s supply chain. To be fair, Nokia, LG, SingTel, Sony and Ericsson also fared poorly in the survey, but Apple stood out in how it did not address and respond to the findings.

Apples Supplier Commitment

Of course this revelation was not the first time that Apple’s supply chain management oversight (or lack thereof) has been ‘shaken to its core’. Despite Apples Supplier Code of Conduct, it appears that they are not fully conforming to their own internal commitment and policies. An insightful post from back in mid 2009 highlighted the series of issues that Apple has had with its supply chain, from human rights violations and pollution to lax supplier oversight and unfortunate subcontractor worker suicides. Apple itself admitted its complacency in addressing social and environmental sustainability issues in a pragmatic but resolved manner.

Nikes Redemption Story- a Work in Progress

Apples current predicament is not unlike another company that relies on a deep contractor supply chain, whose headquarters in my backyard- Nike. In the late 1980’s reports were starting to circulate from Indonesia and Asia concerning Nikes alleged “sweatshops”. Over the course of the 1990’s, continued exposure of unscrupulous labor and human rights practices, combined with intensive public protests and campaigns continued to hound Nike and dragged down its reputation.

By 2001, the issue erupted and Nike was stung by reports of children as young as 10 making shoes, clothing and footballs in Pakistan and Cambodia. Phil Knight, Nikes CEO admitted the company “blew it”. Nike, like many other companies (like Nestle, PepsiCo, Wal-Mart and other consumer products manufacturers and retailers) learned the hard way that taking liberties with “social license” to operate (especially in foreign countries) has its negative financial and reputational consequences.

That’s not to say of course that all is perfect in Niketown. But with the corporate and supply chain infrastructure now in place to monitor, validate and continually improve supplier relations and accountability, fewer violations have occurred. Nike has continued to push open innovation and environmentally focused product design with social accountability in mind. The Ethisphere Institute named Nike as one of the World’s Most Ethical Companies for 2010. The Institute recognizes organizations annually that “promote ethical business standards and practices by going beyond legal minimums, introducing innovative ideas benefiting the public and forcing their competitors to follow suit.” Also, last October, Newsweek magazine took 500 of the largest publicly traded U.S. companies and produced a 2010 Green Rankings List. Nike, was 10th on the list, and was noted for having a strong commitment to evaluating and improving the environmental footprint of its suppliers. They also scored a 97 in the reputation category. (Apple by the way scored 65th, with a reputation score of 71. I guess that low score represents that missing piece in Apples iconic logo.

Stepping Up to the Plate on “Social License to Operate” and Accountability

A great research study from 2002 (from the Center for the Study of law and Society at University of California Berkeley) highlights the steps that companies in the apparel, forest products, consumer goods, oil and energy and other highly capitalized industries have gone through to “redeem” themselves and restore brand trust. They’ve achieved this through rigid compliance with local environmental rules, product and environmental stewardship, verification and proactive social engagement.

Apple needs to do the same thing and implement a proactive supplier sustainability and verification program. As I have laid out in prior posts, companies like Nestle, Corporate Express, Danisco, Starbucks, Unilever and the apparel industry stepped up in a big way to address human rights, fair labor and sustainable development in areas in which they operate throughout the world. So too have major electronics companies like Hewlett Packard and IBM in leveraging their supply chains in assuring that corporate sustainability performance objectives are met. Further, in 2010the International Organization for Standardization (ISO) unveiled its ISO 26000 Corporate Social Responsibility guidance document. In addition, two prominent organizations, UL Environment and Green Seal unveiled and vetted two sustainability focused product (GS-C1) and organization (ULE 880) standards this past year, both of which may markedly affect supply chain environmental and social behaviors in the future. That’s not to mention the issue of conflict minerals, which strikes deep at the cell phone manufacturing sector. Finally, the age of openness and collaboration has arrived on the heels of Wikileaks and numerous high profile reputational back breakers.

Engaging and Leveraging the Supply Chain

The most successful greening efforts in supply chains are based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies. Leading edge, sustainability –minded and innovative companies have found “reciprocal value” through enhanced product differentiation, reputation management and customer loyalty. Suppliers and customers must collaboratively strengthen each other’s performance and share cost of ownership and social license to operate. But supply chain sustainability and corporate governance must be driven by the originating manufacturers that rely on deep tiers of suppliers and vendors for their products.

So Apple should take a cue from Nikes playbook- “Just Do It!” This issue will not go away on a wing and a prayer. Here’s how to get it done- right:

1) As the 2009 post that I mentioned said, get your company on the ground and enforce your Supplier Code of Conduct – now.

2) Open Up and reach out to external stakeholders, not just your suppliers. Engage non-governmental organizations early and often. Find a respected international organization or other third-party to facilitate the engagement process. Treat communities, NGO’s and suppliers with respect.

3) Work with your supply chain and with industry peers to standardize requirements. Create or revisit the resources allocated in internal procurement networks to collaborate on environmental and social sustainability issues.

4) Construct environmental and social accountability requirements at the purchasing phase. Build environmental and social conformance criteria into supplier contract specs and incorporate sustainability and environmental staff on sourcing teams

5) Inform suppliers of corporate environmental concerns. Standardize supplier questionnaires and make sure that the Supplier Code of Conduct lands in the right hands. Promote exchange of information and ideas by sponsoring charettes to facilitate discussions between customers and suppliers on environmental and social license issues. Develop a supplier/vendor peer or mentoring program that promotes co-innovation on sustainability issues

6) Build environmental considerations into product design w/ suppliers. Apple already considers Design for environment (DFE) product innovation and life cycle analyses in its product design. You’d be well served to coordinate minimization of environmental impact in the extended supply chain and work with suppliers to manage end-of-pipe environmental issues. Give your suppliers an incentive to reduce their environmental loading associated with their products and improved worker conditions.

So like sports stars, business stars can redeem themselves and their reputations. But it first takes admitting that you have a problem before you can start down that path. Apple has had a pretty rough year, what with CEO Steve Jobs taking medical leave, its products having persistent quality problems and its connection with negative environmental and human rights issues. I’m hopeful that Apple and others will get the message that ol’ Ben Franklin stated so long ago but holds true today:

“It takes many good deeds to build a good reputation, and only one bad one to lose it.” -Benjamin Franklin